Islamic Banking System vs. Conventional Banking System Munib Faiz Khan

Munib Faiz Khan M.B.A (b) Mor. 2nd Semester Presented By

What is Conventional Banking? More you have, the more you can get. If you have little or nothing, you get nothing. Conventional banking is based on collateral Munib Faiz Khan

Principles of Conventional Banking Manmade Principles Debtor-creditor relationship Interest Munib Faiz Khan

Services and Products offered by Conventional Banks Banks are in business to earn a profit Protect customer’s money’s purchasing power Banks are regulated Loans Savings Accounts Munib Faiz Khan

Functions of Conventional Banks Primary Functions Accepting Deposits Granting Loans Secondary Functions General Utility Services Safe-keeping of valuables in safe deposit locker Undertaking foreign exchange business Munib Faiz Khan

Factors which may attract customers Better products and services Financial position of banks Latest facilities Interest on deposits Strong global image Reputation and economic benefits Munib Faiz Khan

Different conventional Banks working in Pakistan MCB ABL UBL Bank Alfalah Standard Chartered NBP Munib Faiz Khan

What is Islamic Banking? System of banking or banking activity that is consistent with the principles of Islamic Law (Shariah) Its practical application through the development of Islamic Economics Munib Faiz Khan

Islamic Economic System Primary Objectives of Islamic Economic System Equal Distribution of Money Social Justice Munib Faiz Khan

History Of Islamic Banking The first instance of Islamic banking came into the picture in Egypt in 1963 In 1970s several Islamic banks came into existence Dubai Islamic Bank (first Islamic private commercial bank, 1975) The Faisal Islamic bank of Sudan (1977) The Bahrain Islamic bank (1979). Becoming a powerful competitive force in the world today Munib Faiz Khan

Principles Of Islamic Banking Shariah laws and values that comprehensively guide individuals’ in (ritual and non-ritual) life. Dealings with haram (unlawful) services and commodities, such as gambling, liquors, etc. are prohibited. Contracts should be based upon profit and risk sharing; and in the forms of buyer Seller (Murabaha), Lessor – leasee (Ijarah), Partnership (Musharakah), Debtor – Creditor (qard hasan) relationship. Munib Faiz Khan

Expectations From Islamic Banks More ethical business and economy. Better governance, due to participation of investors (debt holders) in risk sharing. Less uncertainty and less transaction costs. Less speculation. Shariah businesses deal only on real sector (goods and services), so that it will add economic value. Munib Faiz Khan

Different Islamic Banks Working In Pak Meezan Bank Bank Islami Pakistan Limited Dubai Islamic Bank Limited Pakistan Dawood Islamic Bank Limited Emirates Global Islamic bank Limited Munib Faiz Khan

Factors Which May Customers in Islamic Banking Interest free loan Financial position of bank Islamic teaching and Shariah Knowledge on Islam and religious environment in the city Economic benefits and better facilities. Munib Faiz Khan

Services & Products of I.B Currently available Islamic Banking Products and services are Partnership based modes of financing Musharakah Finance, Mudarabah Finance, Trade based modes of financing Murabahah Finance, Salam finance Rental based modes of financing Ijarah Finance, Diminishing Musharaka Finance Munib Faiz Khan

Partnership Based Musharakah Finance Both the Bank and the customer contributes towards the capital of the enterprise Under a “diminishing” musharakah, the customer buys out the bank's share over a period of time. The customer and the bank share in the profits according to the agreed proportions, which may be different from the proportions of capital contributed. Any losses of the enterprise will be borne by the customer and the bank according to their capital contributions. Munib Faiz Khan

The structure of a Musharakah Contract ISLAMIC BANK PARTNER (Customer) MUSHARAKAH 60% Ownership 40% Ownership Munib Faiz Khan

Partnership Based Mudarbah The bank provides to the customer (mudarib) all the capital to fund a specified enterprise The customer contributes only entrepreneurship. The customer is responsible for the day to day management of the enterprise and is entitled to deduct its management fee(mudarib fee) from the enterprise's profits. The mudarib fee could be a fixed fee (to cover management expenses) and a percentage of the profits or a combination of the two. A classical mudarib fee is based on a percentage of the profits only. The balance of the profit of the enterprise is payable to the bank If the enterprise makes a loss, the bank (as the fund provider or Rabbul Mal) has to bear all the losses unless the loss has resulted from negligence on the part of the mudarib. Munib Faiz Khan

Trade Based Murabahah Finance The Bank Buys the asset from the Vendor The customer then buys the asset from the bank at a mark-up price, which is payable on a deferred payment basis. The period covering the deferred payment is effectively the period of financing. The title to the asset is transferred to the customer at the time of purchase but usually the customer provides the same or other assets as collateral to the bank for the period of financing. Munib Faiz Khan

Trade Based Salam Financing A Salam (sometimes referred to as Salaf) is a short term agreement in which a financial institution makes full pre-payments for future delivery of a specified quantity of goods on a specified date. A salam is primarily a deferred delivery sale contract usually used for commodity finance. It is similar to a forward contract where delivery is in the future in exchange for spot payment. To mitigate the asset risk a financier can enter into parallel Salam Munib Faiz Khan

Rental Based Ijarah Finance The bank buys the asset from the vendor The bank then leases the asset to the customer Periodic rentals are collected by the bank The title of the asset remains with the bank under as operating Ijarah Title passes to the customer under a Lease ending with transfer of ownership, either gradually over the period of the contract, at the end. Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 1) Functions and operations are based on Shariah principles Conventional Banking 1)Functions and operations are based on fully man made principles Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 2) Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs) Conventional Banking 2) Investor is assured of pre-determined rate of interest Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 3) Aim at maximising profit but subject to Shariah restrictions Conventional Banking 3) Aim at maximising profit without any restrictions Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 4) Partners, investor and traders, buyer or seller relationship Conventional Banking 4) Creditor-Debtor relationship Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 5) Encourage asset-based financing and based on commodity trading Conventional Banking 5) Based on money trading. Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam. Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 6) No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss. Conventional Banking 6) It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed. Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 7) one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat. Conventional Banking 7) It does not deal with Zakat. Munib Faiz Khan

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING Islamic Banking 8) Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position.. Conventional Banking 8) A conventional bank has to guarantee all its deposits. Munib Faiz Khan

Thank You…………!!!!!! Munib Faiz Khan